Deal would cre­ate world’s big­gest to­bacco com­pany

LON­DON » Bri­tish Amer­i­can To­bacco has of­fered to buy out Reynolds Amer­i­can Inc. for $47 bil­lion in an at­tempt to gain a strong pres­ence in the U.S., a lu­cra­tive mar­ket where sales of elec­tronic cig­a­rettes are boom­ing as tra­di­tional smok­ing fades.

The takeover would cre­ate the world’s largest pub­licly traded to­bacco com­pany and com­bine BAT’s pres­ence in de­vel­op­ing coun­tries, where anti-smok­ing cam­paigns are not as strong as in the U.S. and Europe, with Reynolds’ al­most exclusive fo­cus on the U.S.

BAT al­ready owns 42 per­cent of Reynolds and sells Dun­hill, Roth­mans and Lucky Strike cig­a­rettes. Reynolds con­trols about a third of the U.S. mar­ket with brands like New­port, Camel and Pall Mall.

Though smok­ing in the U.S. is de­clin­ing, it re­mains “the largest global profit pool” out­side of China, BAT said in a state­ment Fri­day. The U.S. is one of the big­gest mar­kets for e-cig­a­rettes.

“BAT and Reynolds Amer­i­can have a strong ex­ist­ing re­la­tion­ship, and while cost sav­ings will be rel­a­tively mod­est, the full ac­cess this ac­qui­si­tion would give BAT to the U.S. — a lu­cra­tive, con­sol­i­dated mar­ket with high bar­ri­ers to en­try — means it makes em­i­nent sense,” Shane MacGuill,

head of to­bacco at Euromon­i­tor In­ter­na­tional, said by e-mail.

The Bri­tish com­pany of­fered Fri­day to buy the Reynolds shares it doesn’t al­ready own for the equiv­a­lent of $56.50 each, 20 per­cent more than Thurs­day’s clos­ing price. In­vestors would re­ceive $24.13 in cash and 0.5502 of a BAT share for each Reynolds share they own. That val­ues Reynolds, based in Win­ston Salem, North Carolina, at $93 bil­lion.

Reynolds shares jumped 13.5 per­cent to $53.50 in in New York, while BAT edged down 0.3 per­cent to 47.88 pounds in Lon­don.

The deal is the lat­est at­tempted merger in the in­dus­try as to­bacco com­pa­nies face weak­en­ing de­mand in de­vel­oped mar­kets. Only last year, Reynolds Amer­i­can ac­quired Lo­ril­lard, the maker of New­port, the U.S.’s best-sell­ing men­thol cig­a­rette brand.

Reynolds traces its roots to 1875, when Richard Joshua Reynolds started a chew­ing to­bacco com­pany in what was then Win­ston, North Carolina. The com­pany’s links with Bri­tish Amer­i­can To­bacco date to 2004, when R.J. Reynolds To­bacco Co. merged with BAT’s Brown & Williamson unit, cre­at­ing Reynolds Amer­i­can. BAT was left with a 42 per­cent stake in the new com­pany.

The two com­pa­nies al­ready have a tech­nol­ogy-shar­ing agree­ment in the devel­op­ment of elec­tronic cig­a­rettes.

The merger “is the log­i­cal pro­gres­sion in our re­la­tion­ship and of­fers all share­hold­ers a stake in a stronger, truly global to­bacco and next gen­er­a­tion prod­ucts com­pany,” Chief Ex­ec­u­tive Ni­can­dro Du­rante said in a state­ment.

Reynolds said in a state­ment that it will eval­u­ate the of­fer.

To­bacco com­pa­nies are par­tic­u­larly keen to ex­pand in de­vel­op­ing coun­tries to make up for weaker sales in Europe and the U.S. The in­dus­try has been grap­pling with wide­spread an­ti­smok­ing cam­paigns that have forced com­pa­nies like BAT and Reynolds to di­ver­sify into nico­tine re­place­ments and e-cig­a­rettes to meet con­sumer health con­cerns.

It also comes only months af­ter Bri­tain in­sti­tuted plain pack­ag­ing rules for cig­a­rettes. The idea is to ruin the al­lure of cig­a­rettes cre­ated by ad­ver­tis­ing and pre­vent a new gen­er­a­tion from tak­ing up the habit.

Reynolds warned in a 2016 fil­ing that if its com­pa­nies “are not able to de­velop, pro­duce or mar­ket new al­ter­na­tive prod­ucts prof­itably, the re­sults of op­er­a­tions, cash flows and fi­nan­cial po­si­tions ... could be ad­versely af­fected.”

“The mar­kets in which these firms are the dom­i­nant play­ers are de­clin­ing, and they face ever in­creas­ing com­pe­ti­tion from Asia in seek­ing to de­velop new mar­kets,” said Nigel Driffield, pro­fes­sor of in­ter­na­tional busi­ness at War­wick Busi­ness School in Eng­land.

Asian to­bacco com­pa­nies face less pub­lic pres­sure over in­creas­ing sales in de­vel­op­ing mar­kets, where pub­lic health reg­u­la­tion may not be as strict, he said.